It is good to have Mutual Funds in your portfolio. Mutual funds will help the investors to build wealth with a small amount of money with the help of earning good returns. Before you make investments in any investment option you have to decode the cost. Cost doesn’t really matter in the fixed return products like FDs. The bank will rate your deposits after considering the cost and profits.
Bonds and traditional plans too work on the same logic. You need to consider certain factors such as the rate of interest, final payback, and current inflation rates. You need to think about cost in a market-linked product where the returns are linked to market conditions.
Market-Linked products carry 3 kinds of cost.
- Entry cost
- Ongoing cost
- Exit cost
It is the cost to enter the product, also called “Front Load”. If you invest Rs 100, Rs 2 is cut-out so that Rs 98 is invested, the Rs 2 is called “front load”. A loan is a part of the price of the product which is invisible not usually disclosed.
This is the annual fee that you need to pay to have experts to manage your money. This is also called as “Expense Ratio”. This is the fee charged by the company to manage the funds of the investors. The expense ratio depends on the amount of money you invest in the product. The market regulator “SEBI” has put a ceiling on charges.
- Liquid funds- 14 paise to Rs. 10/- for every Rs 100/-.
- Debt funds- 25 paise to Rs. 1.5/- for every Rs 100/-.
- Equity funds- ranges between Rs. 2/- or Rs 3/-.
These numbers may look small but it forms huge amounts over the years. The fund with a lower expense ratio will get you a net return of 14.5 to 16% and the higher expense ratio will give you 13 to 15%.
Third, an exit cost- it is the cost of selling the product. Funds will levy exit charges. This is a percentage of your corpus. The fund manager takes care of the cost of exit. Debt funds have zero exit cost and equity funds have an exit cost of 1% if you leave even before one year.
Always think on the cost that incurs to redeem your product after one, two and three years.
Thus, the best way to evaluate a fund is by digging a bit deeper into the fees and also looking at the turnover ratio prior to investing. One can also invest in Mutual Funds and build wealth with Zero Fees and Zero Commission. Yes! That’s right. With MyWay Wealth, you can invest in Direct Plan Mutual Funds and start your journey to fulfill your financial goals. Remember! The probability of a successful portfolio increases dramatically when you do your piece of homework.
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